Market Liquidity and Convexity of Order Book (Evidence From China)

TL;DR

This paper investigates the concept of convexity in order books as a measure of potential liquidity, analyzing its statistical properties and relationships with market variables using high-frequency data from China's Shanghai Stock Exchange in 2011.

Contribution

It introduces convexity as a novel measure of order book liquidity and provides empirical analysis of its properties and correlations with key market variables.

Findings

Convexity exhibits specific statistical characteristics in high-frequency data.

Convexity is significantly associated with bid/ask depth and spread.

The study reveals insights into liquidity dynamics in Chinese stock markets.

Abstract

Market liquidity plays a vital role in the field of market micro-structure, because it is the vigor of the financial market. This paper uses a variable called convexity to measure the potential liquidity provided by order-book. Based on the high-frequency data of each stock included in the SSE (Shanghai Stock Exchange) 50 Index for the year 2011, we report several statistical properties of convexity and analyze the association between convexity and some other important variables (bid/ask-depth, spread, volatility, return.)